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PT 3 Pub 970 (2009), Tax Benefits for Education
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 Posted 6:23 PM Mar. 1, 2010 PT 3 Pub 970 (2009), Tax Benefits for Education http://www.irs.gov/publications/p970/ch02.html Table of Contents For 2009, there are three tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit (this chapter), the Hope credit (chapter 3), and the lifetime learning credit (chapter 4). This chapter explains:
What is the tax benefit of the American opportunity credit. For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student.
A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Forty percent of the American opportunity credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Your allowable American opportunity credit may be limited by the amount of your income. Also, the nonrefundable part of the credit may be limited by the amount of your tax.
You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction (chapter 7) to one or more of the education credits.
Overview of the American opportunity credit. See Table 2-1 for the basics of the new credit. The details are discussed in this chapter.
Can you claim more than one education credit this year. For each student, you can elect for any year only one of the credits. For example, if you elect to take the American opportunity credit for a child on your 2009 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2009.
If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and lifetime learning credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. However, you cannot claim the American opportunity credit for one student and the Hope credit for another student in the same year. If you want to claim either of these credits for 2009, you must use the same credit (American opportunity or Hope) for all eligible students. And, in order to claim the Hope credit (see chapter 3) for any student, at least one of the students must qualify under the rules for the Midwestern disaster areas. None of the requirements in this paragraph will prevent any eligible student from claiming the lifetime learning credit.
Differences between the American opportunity, Hope, and lifetime learning credits. There are several differences between these three credits. For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope credit for that student. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between the three credits are shown in Appendix B near the end of this publication.
Table 2-1.Overview of the American Opportunity Credit
The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Generally, you can claim the American opportunity credit if all four of the following requirements are met.
Note.Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. “Qualified education expenses” are defined on this page. “Eligible students” are defined later under Who Is an Eligible Student . A “dependent for whom you claim an exemption” is defined later under Who Can Claim a Dependent's Expenses . You may find Figure 2-1, on the next page, helpful in determining if you can claim an American opportunity credit on your tax return.  Please click here for the text description of the image. Figure 2-1 Can you claim the American opportunity credit for 2009?
You cannot claim the American opportunity credit for 2009 if any of the following apply.
The American opportunity credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2009 for an academic period beginning in 2009 or the first three months of 2010. For example, if you paid $1,500 in December 2009 for qualified tuition for the spring 2010 semester beginning January 2010, you may be able to use that $1,500 in figuring your 2009 credit. Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
Paid with borrowed funds. You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.
Student withdraws from class(es). You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws.
For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
Related expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.
However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. In the following examples, assume that each student is an eligible student at an eligible educational institution.
Example 1. Jefferson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Example 2. Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit. Example 3. When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. You cannot do any of the following.
If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received. Tax-free educational assistance. This includes:
Refunds. Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses , later in this chapter.)
If a refund of expenses paid in 2009 is received before you file your tax return for 2009, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2009 tax return, see When Must the Credit Be Repaid (Recaptured) , later. You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Depending on when you are considered to receive the refund, follow the above instructions or see When Must the Credit Be Repaid (Recaptured) , later.
Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:
Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.
Example 1. Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan.
The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring an education credit (American opportunity, Hope, or lifetime learning), she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).
Example 2. The facts are the same as in Example 1 , except that Joan uses the $2,000 scholarship to pay room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Joan is treated as paying the entire $3,000 tuition with other funds and can figure her education credit on the entire $3,000.
Qualified education expenses do not include amounts paid for:
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.
Comprehensive or bundled fees. Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit , later, for more information about Form 1098-T.
To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements.
These requirements are also shown in Figure 2-2 on the next page. Completion of first 4 years. A student who was awarded 4 years of academic credit for postsecondary work completed before 2009 has completed the first 4 years of postsecondary education. This student generally would not be an eligible student for purposes of the American opportunity credit.
Exception. Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education.
Enrolled at least half-time. A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.
Example 1. Mack graduated from high school in June 2008. In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2008 fall and 2009 spring semesters. For the 2009 fall semester, Mack was enrolled less than half-time. Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2008 and at least one academic period that began during 2009, he is an eligible student for tax years 2008 and 2009 (including the 2009 fall semester when he enrolled at College U on less than a half-time basis). Example 2. After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2009 spring semester. College V classified Shelly as a second-semester senior (fourth year) for the 2009 spring semester and as a first-semester graduate student (fifth year) for the 2009 fall semester. Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2009, Shelly is an eligible student for tax year 2009. Therefore, the qualified education expenses paid for the 2009 spring semester and the 2009 fall semester are taken into account in calculating any American opportunity credit for 2009. Example 3. During the 2008 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Because Larry was not enrolled in a degree program at College X during 2008, Larry was not an eligible student for tax year 2008. Example 4. The facts are the same as in Example 3. During the 2009 spring semester, Larry again attended College X but not as part of a degree program. Larry graduated from high school in June 2009. For the 2009 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2009 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2009. Therefore, the qualified education expenses paid for classes taken at College X during both the 2009 spring semester (during which Larry was not enrolled in a degree program) and the 2009 fall semester are taken into account in computing any American opportunity credit. Example 5. Dee graduated from high school in June 2008. In January 2009, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Dee completed the program in December 2009, and was awarded a certificate. In January 2010, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Dee is an eligible student for both tax years 2009 and 2010 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.
Expenses paid by dependent. If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your American opportunity credit.
Expenses paid by you. If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit.
Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.
Example. In 2009, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying his qualified education expenses himself. Unless an exemption for Todd is claimed on someone else's 2009 tax return, only Todd can use the payment to claim an American opportunity credit. If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2009 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Tuition reduction. When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1.
The amount of the American opportunity credit (per eligible student) is the sum of:
The maximum amount of American opportunity credit you can claim in 2009 is $2,500 times the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit on the next page. Example. Jack and Kay Ford are married and file a joint tax return. For 2009, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expenses of $4,300 in 2009. Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American opportunity credit in 2009. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Form 1098-T. To help you figure your American opportunity credit, you should receive Form 1098-T. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by February 1, 2010. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you actually paid. When figuring the credit, use only the amounts you paid or were deemed to have paid in 2009 for qualified education expenses.
In addition, your Form 1098-T should give you other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether you were enrolled at least half-time or were a graduate student. The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.
The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:
Worksheet 2-1.MAGI for the American Opportunity Credit
Phaseout. If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 9–15 of Form 8863. The same method is shown in the following example.
Example. You are filing a joint return and your MAGI is $165,000. In 2009, you paid $5,000 of qualified education expenses. You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). The result is the amount of your phased out (reduced) American opportunity credit ($1,875).
Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2009 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part V) will be used to reduce your tax as a nonrefundable credit only. You do not qualify for a refund if items 1, 2, and 3 below apply to you.
Earned income. Examples of earned income include wages, salaries, tips, and other taxable employee pay; net earnings from self-employment; and gross income received as a statutory employee. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain homeworkers.
Support. Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship received by you is not considered support if you are a full-time student. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for details.
You claim the American opportunity credit by completing Parts I, IV, and V of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 43. A filled-in Form 8863 is shown at the end of this chapter. If, after you file your 2009 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure an American opportunity credit on that return, you may have to repay all or part of the credit. You must refigure your American opportunity credit for 2009 as if the assistance or refund was received in 2009. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. Add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund. See the instructions for your tax return for that year to find out how to report the recapture amount. Your original 2009 tax return does not change. Example. You paid $7,000 tuition and fees in August 2009, and your child began college in September 2009. You filed your 2009 tax return on February 15, 2010, and claimed an American opportunity credit of $2,500. After you filed your return, you received a refund of $4,000. You must refigure your 2009 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. The refigured credit is $2,250. Include the difference of $250 in the total on the “Tax” line of your 2010 Form 1040 or 1040A. |
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